Executive Summary
In our response to the European Commission’s Call for Evidence on Competitiveness in the Single Banking Market, we challenge the framing that regulatory complexity and capital requirements are the primary obstacles to EU banking competitiveness. Drawing on recent research, we argue that complexity stems from financial innovation and from internal models used by banks in order to reduce effective capital requirements. A misconceived simplification agenda risks weakening financial stability without delivering the economic benefits promised. We propose simplification that eliminates redundancies, reduces regulatory arbitrage while preserving — in some areas strengthening — the prudential architecture built since 2008.

Financial stability risks remain elevated. Recent assessments by the IMF (October 2025), the ECB/ESRB (January and February 2026), and others indicate that financial stability risks remain elevated despite improved headline capital ratios. Growing interconnections between banks and non-bank financial intermediaries, stretched asset valuations, and geoeconomic fragmentation all argue for maintaining, not relaxing, prudential buffers. The Commission’s assertion that “banks are well capitalised” understates the complexity of the current risk environment.

Capital requirements do not undermine competitiveness. Our literature overview finds no evidence that capital requirements are the primary drag on bank competitiveness or lending. Better-capitalised banks tend to lend more steadily through cycles, support higher return on assets, and prove more resilient in stress episodes. The SVB failure of 2023 illustrates what regulatory rollback can produce. We propose that the debate be grounded in this independent evidence rather than in industry self-assessments.

Complexity originates in financial “innovation,” internal model discretion. Regulatory complexity has real costs, but its primary source is not excessive prudential ambition — it is the Internal Ratings-Based (IRB) approach, which allows large banks to use their own models to estimate capital requirements. This creates incentives for strategic underestimation of risk, undermines the level playing field, and generates the complexity that supervisors then struggle to manage. We propose that simplification efforts target this structural problem: replacing internal model discretion with transparent, standardised rules, rather than reducing overall capital levels.

The ECB’s buffer simplification proposal is analytically flawed. The ECB’s December 2025 proposal to merge the countercyclical capital buffer (CCyB) and the systemic risk buffer (SyRB) into a single releasable instrument conflates two analytically distinct tools addressing cyclical and structural vulnerabilities respectively. This merger would make the framework less legible and harder to activate. We propose that buffer reform preserve the CCyB/SyRB distinction and prioritise more proactive CCyB deployment rather than instrument consolidation.

An alternative: simplify by eliminating internal model complexity. Genuine simplification without deregulation is possible. Le Quang (2025) identifies real redundancies: the LCR and NSFR could be consolidated into a single NSFR-based liquidity requirement. More substantially, replacing the risk-weighted capital ratio — dependent on manipulable internal models — with a well-calibrated simple leverage ratio would reduce complexity, improve transparency, and maintain loss-absorbing capacity. We propose these targeted reforms as a credible alternative to the deregulatory simplification currently on the table.

Bank competitiveness is not the same as economic competitiveness. We propose broadening the definition of “competitiveness” to encompass the banking system’s capacity to finance long-term investment and the ecological transition, not only short-term returns.

Rolling back supervisory engagement with environmental risk is not financially neutral. We propose that the prudential framework’s engagement with climate- and nature-related financial risks be maintained and strengthened.

Consolidation risks compounding systemic fragility. Conventional concentration metrics understate the true degree of concentration. We propose that any consolidation be subject to coordinated prudential and competition scrutiny with an explicit systemic risk assessment, and that structural questions about bank size and activity separation be reopened.